Higher taxes are not the solution

As long as the government keeps putting its hands in their pockets to take ever-increasing amounts of their income, they will not do so, and projected economic growth and state income from taxes will always fall short.

As everyone knows, the only two certainties in life are death and taxes. But as
things as are going now in Israel, death has one advantage: when you are dead,
that’s the end of the matter. But if the government and pundits have their way,
after you are taxed, you can always be taxed some more.

Everyone agrees that the government needs to tax people in
order to function.

Since the government at least theoretically wants to
maximize its income without oppressing the locals, the next step should be to
design a tax system that efficiently raises money without driving people crazy,
and that does not discourage them from earning more money, so they can pay more
taxes. In other words, the best system would be a sales tax with no income tax.
Failing that – a one-rate income tax, under or about 20 percent, with few if any
exemptions or deductions other than expenses.

It is hard to understand
how we and much of the world ended up with so many different kinds of
complicated taxes that require the hiring of professional accountants to file
them and thousands of state employees to collect and then redistribute them. Of
course, the explanation is included in those last few words: The government
wants not just to function, but also to redistribute the income of wage earners;
from those who earned the wages to those its bureaucrats favor.

Leaving
the moral problems of this system aside, a technical problem is that it does not
work so well.

Among its many glitches are that once everyone knows the
government is giving out other people’s money, everyone lines up for his share.
A mechanic from Ofakim or an economic policy researcher from Jerusalem (mea
culpa) may have difficulty getting some of that money, but the government’s own
employees, and those of state-backed monopolies, can always strike and shut down
our ports, electricity and so forth, and get more. What do we want, asked Shania
Twain? More, of course, a lot more than we had before.

FROM THEORY to
reality: Over the past few years, electricity rates have skyrocketed as the
Israel electricity monopoly teeters on the verge of bankruptcy; yet almost all
the added income went to pay wage hikes for the monopoly’s employees and its
retirees.

Port workers signed several wage agreements over the past
decade or so, guaranteeing they would not strike again, in return for huge
bonuses. They got the bonuses – we got annual strikes and higher prices for all
imported goods. The government essentially nationalized nursery schools (in
Third-World dictatorships they once nationalized oil and gas, banks... we
nationalize nursery schools), putting private teachers out of business and
engendering huge budgetary outlays it didn’t have, for teachers and buildings it
still doesn’t have.

The result is an unheard-of NIS 40 billion deficit.
Literally “unheard of” – because the government did not want it to be heard of;
when it was revealed, the most definitive action taken by the finance ministry
was to search for the person who leaked the story.

All the local pundits
say taxes have to be raised.

Retiring Bank of Israel governor Stanley
Fischer has been pushing for tax hikes for years. Manuel Trajtenberg, who headed
a committee formed after hundreds of thousands of Israelis took to the streets
to protest the high cost of living, of which the tax burden is a major part,
followed the logic of Israel’s King Rechavam, who when his subjects asked for
relief from the burden replied: “I’m going to increase your burden; my father
chastised you with whips, I’ll get you with scorpions” – and Trajtenberg
recommended more state spending and higher taxes.

Before and just after
the elections a slew of recommendations came out of the finance ministry (or
from reporters who were expressing their own desires but thought they would
sound better if attributed to the ministry): everything from raising the
purchase tax on cars, already the world’s highest, to hiking corporate tax
rates, to charging a special one-time mid-year tax on everyone in 2013. The
government just now put into effect a new two percent tax on high
incomes.

Its officials have declared war on non-taxed income, instead of
asking why so many normally law-abiding people find a need to avoid or even
evade taxes.

FEW PEOPLE would argue that taxes encourage growth. Taxes
are the cost of labor, or investment, and if they rise, the cost rises and
people “buy” less work or investment. So the government gave out lots of money
it did not have, the country is teetering on the verge of recession,
unemployment is higher than it has been for years – and our bureaucrats and
columnists are calling for higher taxes and slower growth.

One can hope
the new government will not choose a new governor for the Bank of Israel,
minister of finance, Knesset Finance Committee chairman and various other
officials who want to continue the irresponsible tax-and-spend behavior of the
past that has done such wonders for the economies of Greece, Spain and much of
Europe, but who know that the key to Israel’s economic survival is economic
growth, and that given half a chance, Israelis will grow the economy.

As
long as the government keeps putting its hands in their pockets to take
ever-increasing amounts of their income, they will not do so, and projected
economic growth and state income from taxes will always fall short.

The
author directs the Public Policy Center at the Jerusalem Institute for Market
Studies (JIMS).

Sites Of Interest

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